(1) the US, (2) those nations with strong trade surpluses (say, Germany and Japan), (3) those nations that seem to run near perpetual current account deficits but attract a lot of foreign capital (say, Australia), and (4) even the Eurozone, if it were suitably reformed with a union-wide fiscal policy, would be able to achieve full employment via MMT-style policies.

But those nations, especially developing nations, that face real constraints on their current account deficits would perhaps find it difficult to maintain full employment via MMT, if balance of payments crises ensued in response to surging imports.

All this underlines the need for reform of the international payments system. It’s time to give developing countries the support from the IMF and World Bank (suitably reformed) that they need for infrastructure and industrial development to achieve some degree of export balance and internal wealth, to make MMT work.

To be fair, I think Bill Mitchell has tried to address some of these criticisms here:

“… a nation might have a food supply problem just because of location. Then they have to import food. For example, in Kazakhstan where I am working at the moment, they face really significant problems in winter getting fresh vegetables and fruits. Many of these nations also have very little that the World wants by way of their exports. The fact that such a country’s national government is sovereign in its own currency and can spent how ever much it likes in that currency will not solve the problem – there is not enough goods and services (in this case) food for the sovereign government to purchase.

In those situations, a country requires foreign goods and they need to export to get hold of foreign currency or receive development assistance from the rest of the World. In the latter case, I see a fundamental change is required in the role of the IMF (more or less back to what it was intended to do in the beginning). Where are country is facing continual current acccount and currency issues as a result of the need to import essential goods and services, the IMF might usefully act to maintain currency stability for that country. ....

It is often claimed that MMT does not consider exchange rate issues sufficiently. I do not actually know why people think that other than they are just rehearsing their fears that somehow violent exchange rate swings are a common occurrence. They are not. But the story goes that the amorphous financial markets are poised to pounce on any country that runs a budget deficit and will destroy their currency if they feel there is no intention to get back into surplus.

The other angle on this is that deficits apparently fuel import growth and plunge the currrent account into further deficit which then leads to depreciation (if floating) or a foreign reserve drain (if pegged). This, in turn, leads to expectations of further depreciations and the currency is sold short by hedge funds.

They never really say the same thing about a private investment boom which sucks in imported productive capital. Somehow adding productive capacity in the private sector is ‘more efficient or more productive’ than, for example, a large-scale public education policy which increases the capacities of the population in both the workplace but also general life.

They also never really say anything about private imports of luxury cars (so-called positional goods) into developing countries. ....

It is often claimed that MMT does not consider exchange rate issues sufficiently. I do not actually know why people think that other than they are just rehearsing their fears that somehow violent exchange rate swings are a common occurrence. They are not. But the story goes that the amorphous financial markets are poised to pounce on any country that runs a budget deficit and will destroy their currency if they feel there is no intention to get back into surplus.

The other angle on this is that deficits apparently fuel import growth and plunge the currrent account into further deficit which then leads to depreciation (if floating) or a foreign reserve drain (if pegged). This, in turn, leads to expectations of further depreciations and the currency is sold short by hedge funds.

They never really say the same thing about a private investment boom which sucks in imported productive capital. Somehow adding productive capacity in the private sector is ‘more efficient or more productive’ than, for example, a large-scale public education policy which increases the capacities of the population in both the workplace but also general life.”Bill Mitchell, “Current Accounts and Currencies,” Billy Blog, October 25, 2009.

There is serious debate to be had here, not because of any hostility to MMT (indeed I personally regard MMT with sympathy as a more radical form of Post Keynesianism), but in the spirit of constructive criticism.

19 comments:

MMT is a framework for analysis, not a specific set of policies that will work for every country in all circumstances. As an analysis framework, it is just as valid for Kazakhstan as for the U.S., but that does not mean that Kazakhstan can pursue the same policies as the U.S. It all depends on available real resources, as any MMT advocate will say.

The main point is that there is a *lack of focus* on the balance of payments issue in MMT, much as there is on the government deficit issue.

In other words it is lower down the pecking order of concerns.

MMT puts forward an appropriate policy for the external account. Don't pay foreigners to hold your government sector financial assets, and make it clear that you intend to 'accommodate' excess savings in the non-government sector.

If foreigners choose to hold government sector assets in that light then the risk is with them. You've done as much as you can to discourage them.

If foreigners hold private sector assets or financial assets, then the bankruptcy process handles any disruption.

Beyond that MMT says concentrate on maintaining domestic output to the level of real resources - essentially countering the attempts by foreign central banks to manipulate your domestic sector for the benefit of their exporters.

The external sector should be largely left to float to its natural point - balance between export and imports being preferred but there is no reason to turn away extra imports if foreigners desperately want to give them to you in exchange for fancy pieces of paper.

So you're not trying to buy imports with your paper. Other people are desperate to sell their exports for your paper (so they can swap it at their own central bank for example). Again a difference in emphasis - push rather than pull.

There seems to be a lack of understanding that the goal of MMT is to get back to the real limits of the economy. Those may be very constrained in certain parts of the world, but there is no need to run *under* even that limited capacity just because of currency fears.

I find the issue the of exchange rates to be the most confusing part of economics in general so I'm having a hard figuring out how a developing country could develop the necessary credit needed to secure foreign resources needed for development of infrastructure and industrial sectors when the floating rate allows for speculators to buy and then short your currency regardless of the real output.

In short, floating rates are could be unstable but developing countries need to tie their credit to something that is stable in order to have the credit necessary to secure the real resources for the development that would validate the credit in the first place.

The internal demand for currency based on the tax regime can only supply you with so much credit as the physical basis for exports has real limits as does the rate of taxation so the amount of foreign reserves you can buy back is limited. Simply increasing the domestic money supply by fiscal expansion won't help you bring in foreign real resources and neither will increasing domestic demand for the currency.

If you a poor agricultural importer with no industrial base like many African countries on what basis do secure long term credit within your own currency? The idea that foreign investors would want your money because that would let them expand their market into your country seems to be a pretty weak basis for the long term credit need to provided lack real production. Real production lets you increase the amount the credit needed to buy that production and thus attract foreign investment but without some sort of promise as to the future productivity I don't see foreign investment.

A fixed exchange rate in a sense is promise of future productivity by the nation by stating we agree that in the future we will buy on your future output at rate tied to the increase in value of our future productive output due to our current consumption of your output which will let you let us borrow in the present at a fixed price in our currency. In short, foreign currency obligations promise one countries access to foreign goods at a consistent rate provided we actually do have increasing real output by both countries.

A floating rate doesn't seem to allow for that kind of credit creation. You could say that MMT's definition of monetary sovereignty actually restricts a governments purchasing power to only being able buy what is being sold in their currency. Am I wrong on this issue? I'd appreciate your commentary on this issue.

I've wonder why a dual exchange rate couldn't be used as means of having a agreed upon rate while at the same time giving yourself the ability to devalue claims your own currency should speculators try and play rates against each other.

The alternative international payments system advocated by some Post Keynesians would be a return to fixed exchanges with an adjustable peg, with the surplus nations obligated to spend their surplus dollars, as in Paul Davidson's proposals.

Yes people that use the MMT framework advocate policies but it is not a set of policies, for e.g payroll tax holiday, platinum coin seignorage is only applicable to the US not any of the other suggested nations by Cesaratto.

So everything he suggests is misleading at best.

MMT is not something that can be implemented, it is an objective analysis of what is and how it functions.

I think Lord Keynes provides a good balance in the post (even if he has double posted it) to show that it is misleading (my word, not LKs) and does come under consideration.

I disagree with Lord Keynes that MMT is a more radical version of PK, and I know those that identify as PK will strongly disagree with me but MMT is the core of PK. Once we get past the accounting identity and sectoral flows, it shows everything we need to know about macroeconomics is derived from "buffer stocks".

It shows it simply, no veil of complex jargon to keep economics elite - no other school of thought does this.

Bill Mitchell’s criticisms of MMT in connection with Kazakhstan are flawed. He says “Many of these nations also have very little that the World wants by way of their exports..” And then refers to a country that “is facing continual current acccount and currency issues as a result of the need to import essential goods and services,”

I suggest that ANY GROUP OF PEOPLE living in a specific geographical location who find that the world does not want what they can produce and who have to import essentials are in a hopeless position. That is not a weakness in MMT.

E.g. if a group of people went to live in the middle of the Antarctic, they’d be in a similarly hopeless situation. The only people actually living in the middle of the Antarctic are heavily subsidised – mainly by the U.S. taxpayer.

The solution would be social environmental policy. If the needed imports are food, figure out if there is a sustainable way to create more food supply domestically. No? Then figure out how to reduce the population so you need less food.

Similarly, if the needed import is oil, start retooling the economy to run off of solar power.

"I suggest that ANY GROUP OF PEOPLE living in a specific geographical location who find that the world does not want what they can produce and who have to import essentials are in a hopeless position. That is not a weakness in MMT."

I completly agree Ralph. And It doesn't mean that borrowing in foreign currency to run CAD makes their situation any less hopeless.

And how do you argue that keeping forex rate artificially high by borrowing in foreign currency is somehow beneficial? You will have even bigger CAD to finance. The CAD financing was the problem in their argument in the first place and now they are saying run even bigger CAD to avoid problems? And what problems? Currency depreciation? what would have happened if Mexican government didn't borrow from IMF in 2008? They say peso collapsed. They didn't even have high enough inflation.http://www.tradingeconomics.com/mexico/inflation-cpi

It's only analysis if the actual country you are talking about already has a JG program. For other states that don't have a JG program and fall under the basic requirements of modern monetary systems, it is about policy.

"The fact that such a country’s national government is sovereign in its own currency and can spent how ever much it likes in that currency will not solve the problem – there is not enough goods and services (in this case) food for the sovereign government to purchase."

Ah. This is related to my analysis of the 1970s stagflation: I believe it's *entirely* due to the oil shock.

If your economy is dependent on an actual resource which you must import -- or worse, which is running out entirely and which you must somehow figure out how to substitute for -- Keynesianism, MMT, none of macroeconomics will do a whit of good.

You need environmental policy: your population has to reduce to match your food supply, your production has to be within your solar energy budget, etc. International trade may substitute temporarily for constraints when importation is possible, but in the medium and long run, a real resource constraint must be dealt with by a real resource management policy -- central planning, in fact -- not by broad generalities which ignore the details of the resource.